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Will Oil Markets Rebalance Before The OPEC Deal Expires?

The oil market is still on track to rebalance, although the pace is “stubborn” and will still take some time, the IEA said in a new report.

Market sentiment has been fickle throughout summer, and despite the recent plateauing of oil prices, the IEA reassured everyone in its new monthly report that things are still proceeding apace. For example, in the second quarter, global inventories fell by 0.5 million barrels per day (mb/d), and preliminary data for July show that the strong inventory declines continued, particularly in the U.S., which showed a 790,000-bpd drawdown. Still, the inventories are falling from “great heights,” the top oil official at the IEA said, and they will take more time to normalize.

Quite a bit of time, actually. The IEA estimates that even if global oil inventories decline by 0.5 mb/d through March 2018, when the OPEC deal is set to expire, inventories would still sit 60 million barrels above the five-year average. In other words, even if things continue to go well, without any hiccups, the long-sought “rebalancing” won’t be reached until next year.

Of course, things would be going much better if not for the faltering compliance rate from OPEC, the IEA says. “There would be more confidence that re-balancing is here to stay if some producers party to the output agreements were not, just as they are gaining the upper hand, showing signs of weakening their resolve,” the IEA concluded in its report. The Paris-based energy agency pegged OPEC compliance at just 75 percent in July, down from 77 percent in June. Add to that the non-OPEC countries party to the deal (including Russia) only achieved a compliance rate of 67 percent. In short, the 22 countries involved in the agreement are producing a combined 470,000 bpd above the levels that they promised. Related: Tech Guru Unveils New Battery To Challenge Lithium-Ion

Libyan production jumped in July, rising by 154,000 bpd to a new high above 1 mb/d. Nigeria added 34,000 bpd and even Saudi Arabia added 31,000 bpd. Those additions were slightly offset by declining production in Iraq (-33,000 bpd), Venezuela (-15,000 bpd), Angola (-19,300 bpd) and the UAE (-6,700 bpd). Still, OPEC added a combined 172,000 bpd in July, taking output up to its highest level so far this year.

The production growth has rattled the oil market, spooking traders just as a newfound sense of optimism appeared to be taking hold. Oil prices fell on Thursday and Friday on fears of faltering OPEC compliance.

“If re-balancing is to be maintained, the producers that are committed to seeing the task through to March 2018 need to convince the market that they are in it together. It is not entirely clear that this is the case today,” the IEA warned.

But, on the bullish side of things, the IEA revised up its oil demand figure to 1.5 mb/d for 2017, an increase of 100,000 bpd from its July report. The second quarter in particular saw demand growth reach a staggering 1.8 mb/d annualized rate. Demand growth will more or less continue at its current pace through next year, with demand projected to expand by 1.4 mb/d in 2018.

Undercutting that, however, is the fact that the IEA made significant revisions to its data for the past few years, slashing its estimates for demand in developing countries. “We have accordingly reduced our estimate of non-OECD demand for 2015 by 0.2 mb/d and for 2016 by 0.4 mb/d,” the IEA wrote. “The impact of carrying this lower demand base into 2017 against unchanged supply numbers is that stock draws later in the year are likely to be lower than first thought.”

Overall, the message to the market is one of patience. “Markets are tightening, I don’t think there is much doubt about that now,” Neil Atkinson, head of the Oil Industry and Markets Division at the IEA, told CNBC Friday. But he went on to caution that it will still take time. “It's very difficult to see, based on the current fundamentals, oil prices rising significantly in the next few months.”

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